Analysts: Prospects and pitfalls ahead for trucking

The uncertainty hanging over the general economic picture for the U.S. is also clouding trucking’s near-term future as well, according to Wall Street analysts, with the current plateau in freight volumes poised to quickly shift into high gear if expected demand materializes.

“For the last six months, TL freight demand has been ‘flattish’ – there’s not been a lot of growth and April’s freight numbers disappointed compared to March; there’s not been much ‘follow thru’ on demand,” John Larkin, head of transportation capital markets research for Stifel, Nicolaus & Co., explained during a webinar sponsored by Zonar this week.

Larkin thinks some of the reasons behind the sluggish trend of late in truck freight stems from the federal payroll tax increase implemented at the beginning of the year as well as fallout from federal budget cuts due to the sequestration back in March – both of which affected retail and industrial demand.

“Domestic freight trends were below-seasonal into April, consistent with the end of March [as] Easter timing and cold spring weather tempered retail trends, while industrial trends moderated, creating a softer-than-expected start to second quarter demand,” he explained. “Some carriers though remain optimistic that delayed retail demand will support volumes into May/June.”

Indeed, Stifel’s Larkin stressed that the potential remains for strong June and July trucking tonnage in part due to the $50 billion in Hurricane Sandy recovery funds coming on line. “That, the fair amount of pent-up demand we think exists, and the possible tightening of TL capacity as hours of service [HOS] reform begins on July 1,” he said.

Baird’s Hartford echoed that assessment, noting that while spot demand trends were soft through April – with the firm’sspot truck demand indicator trending below normal seasonal levels through last month, indicating softer freight demand trends – TL carriers said that the supply/demand dynamic remains in their favor.

“Core TL pricing growth improved 1.5% to 2% year-over-year in the first quarter, consistent with expectations,” Hartford said. “Despite the modest demand environment, pricing growth is supported by rising costs and disciplined capacity deployment among carriers,” adding that Knight Transportation believes the first quarter will mark the “low point” in rate growth for 2013, with rates improving through the balance of the year.

The real critical piece going forward, said Stifel’s Larkin, is that the “supply/demand” picture as it relates to capacity should begin to shift firmly into trucking’s camp as HOS and other government safety initiatives like the Compliance Safety Accountability or CSA program continues to restrict if not shrink available TL and LTL capacity.

“TL capacity has decline 20% since the Great Recession and hasn’t been replaced, and I think we’re now on the cusp of additional capacity downsizing due to a host of government regulatory efforts,” he pointed out. “Large carriers are also continuing to move away from ‘conventional’ long haul to regional, dedicated, intermodal, and brokerage services – leaving traditional long haul service to smaller carriers.”

Indeed, Baird’s Hartford said shipper concerns about access to capacity, particularly in front of the July 1 implementation of new HOS rules, are protecting truck freight rates during bids.

“TL carriers have been testing [their] fleets under the new HOS rules and expect 2% to 5% negative impacts to fleet productivity as a result of the provisions,” he said. “Continued cost pressures within the truckload market promote the need for pricing growth among carriers, which protects the downside risk to freight rates this cycle in our view.”

As a result, Baird’s expectations for 1.5% to 2% year-over-year core contractual TL pricing growth this year will be enough to offset cost inflation and hold margins roughly flat. “Pricing improved an estimated +1.5% to 2% year-over-year in the first quarter, consistent with our expectation [with] downside risk is protected by limited capacity additions and rising industry costs,” Hartford noted.

“Additionally, regulations designed to support safer highway conditions (CSA and HOS) provide incremental pressure to an already tight driver market,” he added. “Some carriers have estimated that HOS regulations, scheduled to be implemented in July 2013, could negatively impact fleet productivity by 5%. As a result, we continue to expect carrier capacity decisions to remain more disciplined given inflationary expectations for equipment, maintenance costs and driver wages.”

Larkin also emphasized that while intermodal continues to witness a spike in demand – up 5% year-over-year and year-to-date – only so much truck freight can be moved to rail and thus may not offer a clear-cut alternative to a trucking capacity crunch.

“Almost half to three-quarters of the freight shifting from truck to railroad intermodal is in high density lanes,” he said. “Intermodal is not the [capacity] solution as it needs long distances and high density to be efficient.”